Wednesday, January 6, 2010

Why I'm (still) cautious

1. PAYROLLS. ADP payroll numbers came in (slightly) worse than expected and the market is up. Granted, this is not very well correlated to the important BLS NFP due out Friday, but it has to be some indication. The market is up over 1% since last month's NFP and we are factoring in a positive jobs number for this Friday. If this disappoints, what will happen? If it's slightly better than expected, is that already factored in? My guess is that either way we have a better-than-even chance that we sell the news.

2. SENTIMENT. The AAII bull/bear ratio is at multi-year highs going back to Feb 2007... the market high was Oct 2007. As Eric points out, this may pre-date any market correction by weeks or even months, as it did in 2007, but this certainly is not an indicator to put lots of new money into the market. One young trader being interviewed by Mandy Drury on CNBC stated yesterday, "Well as long as the market keeps going up, then we're still buyers." Okay. I realize that traders rarely look at fundamentals, but this naked sentiment belies the mindset of this historic market move.

My favorite recent indicator is the latest comment by Dan Gross, Newsweek's financial guru, who actually said in his latest post called Snap Out of It: "Maybe it's time for a little blind faith." Yup. After a 67% move, mind you, he's implying we don't have enough "faith." Any contrarian worth his salt would view this as an intermediate top.

3. CALIFORNIA. The sixth largest economy in the world may need to take drastic measures to avoid bankruptcy. Nuff said. Think about what this will do to jobs and consumer spending in the intermediate term.

4. GREECE. Okay, this is bit esoteric since Greece is tiny compared to California, but it's a reminder that sovereign defaults are still in play and gives a picture about how data is viewed thru a bullish lens. The ECB has stated emphatically that they are not willing to forward any more bailout money to Greece and in response the Greek Finance Minister has said that he doesn't need any more help, thank you. “Hopefully what they will be seeing will be reassuring them that indeed we are moving in the right direction and they should continue funding our large debt,” he said.Hopefully? Think about this. What was he supposed to say in response to to the ECB's hard line, Well, then we're bankrupt? Not. The market seems to think this is a bullish statement, up over 4% today... I would be wary.

Okay, I've been wrong plenty times before and my market allocation has been mostly cash and bonds according to T.Lo's Dollar Core Portfolio since November. I've been around long enough to have grown comfortable going against the crowd: the goal is to survive, like the cockroach.

FWIW, if the jobs number is positive on Friday, I'll gradually increase my stock allocation and scale back in slowly according to T.Lo's Strategic Portfolio.

Eric will view this bearish sentiment as a contrarian bullish indicator, but it's a tiny drop in a sea of bullish sentiment.